Main Residence overlapping 6 Months Rule

First time poster here.

A friend has bought a new property and it's going to be settled in mid Jan 2018. However, there is a tenant living there at the moment until late May 2018. She intends to move in after the tenant leaves at the end of lease.

She will also be selling her old property which has been her main residence since Day 1. She wants to know what are the CGT implications.

I've read up on the ATO about this 6 months rule that applies to purchasing a new home and disposing the old one where you can treat both property as main residence.

If she settles her old place after May 18 and before mid July 18, everything is hunky-dory.

Now here is the question. If she settles between Jan - May 18 (i.e. after the settlement of the new place and before the lease ends), let's say, in Feb, does that mean the exemption will only apply to the period between the new place (mid Jan 18) and the old place (Feb 18)?

That means from Feb - May 18, the new place will be treated as an investment property and CGT will apply.

Is my thinking correct?

 

Lets call old home Prop 1 and new one Prop 2.

Prop 2 can NEVER get a CGT main residence exemption until first occupied as the persons home. You can intend to live ina property and claim exemption. It is a factual issue. That means it will always have a period of "X"days which is taxable v's the duration of ownership. It can NEVER be 100% CGT exempt. It also means if its in NSW at 31 Dec 2017 its subject to land tax subject to threshold etc.

Prop 1 will be CGT exempt as its home (assuming no spouse / partner issues etc). If sold before moving to Prop 2 then no issues at all. If sold AFTER moving to Prop 2 then the 6 month overlap may also be first used OR (not both !) the CGT main residence absence exemption which further extends past 6 months. BUT if that is chosen the exempt days can ONLY ever apply to one property for any specific day and no exemption applies on overlap either as after 6 months that issue is terminated. So it seems PROP 1 needs to be sold (contract made) before late May 18 to bypass tax issues. Even then the period between Jan 18 and May 18 on Prop 2 can never be exempt.

 

If property 1 is sold within 6 months of acquiring property 2 then the main residence could be counted on both, provided that property 1 was not income producing. But they are not living in property 2 so it cannot be the main residence until after they move in so property 2 will be subject to cgt

 

But for clarity the dual 6mth exemption has two conditions of course
1. Must have commenced to occupy new property and
2. Former property MUST sell within 6 months after ceasing to reside (contract date)

If tenants are in new property it cant be met unless former house is sold within 6 months after May 18. The OP q was about selling between Jan and May (hopefully). The overlap concession will only apply if sold June-Dec 18+

 

Thanks for the replies.

Terry, that's my interpretation of the rule. That means the period between the settlement of property 1 and the end of lease of property 2, property 2 will be treated as an investment property, thus CGT based on the number of day it was rented out vs the duration of the ownership. Is that right?

Paul, does that mean she needs to sell property 1 within 6 months of the settlement of property 2 (late Jan 18), or from the day she moves in (May 18)? Also, is it the date the contract is signed or the date settlement occurs?

 

Yes

Legislation says squires an ownership interest so I think contracts might be the relevant date.

 

CGT refers to contract dates but the 6 month and main residence issues are factual real dates. BUT when you first acquire a CGT asset the rule is you move in as soon as practicable ...This technically then allows the period between contract and move in to be CGT free if you do move in. And you cant be resident in the home until actual occupancy.

In the example given I would think if she sells (makes contract) to sell within 6 months of date she actually stops living in old house and moves into new house (typically same day). One day can destroy that rule so important do so within the 6 months NOT at 6 months.

 

Thanks for the reply.

 

this is not correct.

ownership interest ends on settlement. refer to s 118-130

(3) For land or a * dwelling where you have a contract for the happening of the * CGT event, you have an ownership interest in it until your legal ownership of it ends.

The ATO evens makes this clear on their website

“You have legal ownership of a dwelling or land from the date of settlement of the contract of purchase (or if you have a right to occupy it at an earlier time, that time) until the date of settlement of the contract of sale. This is called your 'ownership period'.”

Ownership interest and ownership period

re selling within 6 months this is also not correct.

If it takes longer than six months to dispose of your old home, both homes are exempt only for the last six months before you dispose of the old one.

https://www.ato.gov.au/General/Capi...n-residence/Moving-to-another-main-residence/

 

Thanks for this. So the net effect if a person settles on the sale of old property in 8 months is that they have to pay 2 months worth of CGT on either one of the properties but they can decide which one at the time of sale?

 

Yes. Thats the broad position. Assuming a spouse defacto etc doesnt do same.
The settlement date isnt relevant - The contract dates are.